updated 02:25 pm EDT, Wed April 11, 2012

DOJ starts lawsuit to force fair e-book prices

(Updated with settlement news) As suspected, the US Department of Justice has sued Apple and publishers over claims of unfair e-book pricing. The complaint accuses Apple of colluding with publishers by both requiring a switch to an agency model, where publishers set the prices and ask for more, as well as demanding "most favored nation" status where no rival could have a lower price than the iBookstore. Some publishers are believed to have settled, but Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster are all targeted.

Apple and Macmillan are believed to be the only two companies that didn't participate in negotiations, but the lawsuit indicates that none of the major outlets had reached a settlement before the DOJ action. A late update from Bloomberg has cited a pair of sources claiming Hachette, HarperCollins, and Simon & Schuster could settle as soon as Wednesday.

DOJ officials are primarily concerned that Apple's e-book deal, made ahead of the iPad launch, is keeping e-book prices artificially high. Apple has asserted that Amazon had near-monopoly market share of e-books at the start of 2010 and that the pricing change helped level competition, not just for Apple's iBookstore but for Barnes & Noble's Nook Store and other digital peers. Amazon isn't considered innocent in the case as it was regularly accused of price dumping at the time, selling books below cost to squeeze out competitors that couldn't afford to lose money.

Apple's rationale for holding out isn't clear. If aware that most publishers are likely to settle, it may not have much choice but to face a penalty if it decides against settling on its own. DOJ officials may not block the agency model, but they will likely demand Apple give up the most favored nation clause and let Amazon, Barnes & Noble, and others charge less.

The Absence of Amazon

There's only one part of these agreements the DOJ should be concerned about, the 'no lower price elsewhere' requirement. Since Apple and Amazon have different ebook formats and marketing requirements, it's quite legitimate for authors and publishers to set different prices for what may be quite different books. One for an iPad may be heavily illustrated. One for an epaper Kindle can't be.

The rest of the lawsuit is bosh. Mark Croker of Smashwords has some impressive data demonstrating that, since his company adopted agency pricing there has been a slow but steady decline in the price of their ebooks. Agency pricing lets independent authors and small publishers experiment with lower prices.

Note too that Amazon had 90% of the ebook market at the time these discussions were held and has about 70% today. The absence of Amazon from this lawsuit is quite telling. After all, it was Amazon that, with a near total domination of the ebook market, was selling below cost to destroy their competition--a classic monopolist move. It's to Amazon that the DOJ ought to be looking.

One of the Sherlock Holmes stories has an interesting plot twist in which a key clue is a dog that didn't bark. In this dispute the critical clue is the utter absence of DOJ 'barking' at Amazon.That's very suspicious.

The question is...

Mixed feelings

I have really mixed feelings about this, both as consumer and someone getting into ebook publishing.

On one hand, the big publishing houses are almost certainly participating in price collusion to artificially inflate the prices of ebooks. They're big, fat, old companies with a lot of inertia who are fighting to avoid having to adapt to a new world with different constraints, and one in which it's quite possible their role will be marginalized. It's bad for consumers, bad for the future of the industry, and greedy. It's also, in all likelihood, actually illegal, as this lawsuit asserts.

On the other hand, you have Amazon. In the short term, they're unquestionably fighting for lower prices--below cost, even. The problem is, their goal as a "thin" middle man is to both drive competitors out of business by undercutting them with an existing cash horde and device lock-in, and--more insidiously, to basically devalue the entire market by getting consumers accustomed to artificially low prices.

So while Amazon definitely isn't involved in the price collusion of this lawsuit, and in general their goal is to lower prices for consumers, they're still doing their best to lock in a monopoly, and create a marketplace where the only company that makes money off the transaction is them. Heck, if they had their way, they'd still be taking a 65% cut of profits. They essentially were fighting for a future in which they WERE all the big publishers, and had no competition.

For sure, the most favored nation status is kind of an insulting contract clause, and I hope the DoJ succeeds in getting rid of it. That said, Amazon, of course, has a very similar clause--how come they're not being targeted by that part of the lawsuit?

Can't wait

Personally, I can't wait to see ebook prices drop. I would love to be purchasing eBooks, but the price of eBooks needs, absolutely, to reflect ALL the drawbacks associated with the format, and the associated lower cost to publishers (no printing, no shipping, no returns). eBooks can't be loaned, can't be resold, can't be given away, can't reasonably be read in the bath, can't be read during take-off or landing times, can't be.........). This *should* make eBooks intrinsically less valuable than print books in the first place, add in publisher savings and current eBook prices are absolutely absurd. $1.99 or $2.99 might be a good starting point as compared to a mass-marked paperback of the same title (currently running around the $8 mark).

Missing the Point

I think that everyone here is missing the point. Everyone says that that they think that eBooks should be cheaper because of lower overhead, print costs, etc, etc. How is that overhead much lower? The only thing you could do to reduce the cost of a physical book would be it's printing costs which are only between $1-$3 a book depending on it's size.

You still have to pay for distribution (which in this case is Apple, Amazon or Google - 30%), you have to pay your authors, editors and everything else associated with the book. So saying you want an eBook for $1.99 to $2.99 is ridiculous. If everyone paid that, then what kind of books would you be getting? Not good ones - that's for sure.

It's about the content - when I buy a book, I am paying for the quality of the content - that is what should determine the price, and for the most part does. How different is that from movies that you buy and download? The movie studios aren't decreasing the price because they aren't burning DVD's and sending them out. We pay for the content. Could that pricing model be better - yes, definitely, but does it require the government stepping in and targeting Apple when Amazon had the monopoly, and still has huge market share?

If Amazon had it's way - the way they were going before Apple stepped in, Amazon would be the sole distributor and then once they had pushed everyone out of the way they would become publisher as well - they have already purchased at least one publisher and started on their own titles - so they are competing with other publishers directly.

Re: Mixed feelings

On the other hand, you have Amazon. In the short term, they're unquestionably fighting for lower prices--below cost, even. The problem is, their goal as a "thin" middle man is to both drive competitors out of business by undercutting them with an existing cash horde and device lock-in, and--more insidiously, to basically devalue the entire market by getting consumers accustomed to artificially low prices.

How is this different than Apple and anything they sell? It's all device-locked-in (books are even worse, can't even read on a mac!). They have a huge cash horde to pay for things like the app store and such.

Oh, and Apple did a great job devaluing the price of music such to make everyone think a song should only cost 99 cents and no more.